Gartner: Outsourcing deals will go on a diet

How will outsourcing deals grow and shrink at the same time? Gartner predicts that more companies will outsource in 2004 but that the deals will be leaner and meaner.

Don't count on seeing many more 10-year, multibillion dollar outsourcing deals in the near future. And this has little to do with political backlash.

The future of outsourcing lies in shorter, smaller and more focused projects, according to a recent report by Stamford, Conn.-based Gartner Inc.

"Buyers want to purchase more point-specific solutions," said Linda Cohen, a managing vice president for Gartner. "They have an expectation that instead of just getting rid of the headache of infrastructure, now they want to get something out of it."

In fact, the overall number of enterprises that take up new outsourcing relationships will increase by 30% in 2004, according to the report.

Outsourcing operations should change the operating model of an enterprise, Cohen said. Historically, outsourcing has been viewed as a way to control the cost of technology over time. Organizations have now come to view it as a different operating model that uses multiple sources -- some internal, some external, some near shore and some offshore, Cohen said.

"The CIO is the broker of a service, rather than the direct supplier," Cohen said. "It's a change in the model rather than a tactical Band-Aid."

Outsourcing will continue to trend toward shorter-term deals with more specific requirements, Cohen said. As a result, outsourcing agencies will focus on their particular areas of expertise and look to partners for help. Gone are the days when a company could expect an outsourcer to come in and run a project with the same tools, the same processes and with the same style the hiring company uses and do it cheaper. Outsourcers are focusing on particular business processes or architectures.

"Even the largest service providers are starting to pick their poison, recognizing [that] they can't be excellent in every segment of every vertical," Cohen said. "They're getting much more focused. The bottom line is the more you want it done your way, the longer the term of the deal and the higher the price. The more you can accept their way, the shorter the term and the lower the price."

Additionally, some of the larger outsourcers will begin to farm out parts of the project, much as a general contractor hires subcontractors, she said.

Proper outsourcing requires an ongoing relationship that is measured and managed proactively by C-level executives, Cohen added.

Functions that are traditionally outsourced, such as IT, human resources, customer care, finance accounting and procurement, will continue to be the main segments for growth in 2004, Cohen believes.

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